For years Amazon seemed invincible, an e-commerce behemoth that made other companies shiver and their stocks crumble when it muscled into their markets. It helped Amazon stock soar into four-digit territory. And Amazon earnings reports often delighted investors.
But the company proved vulnerable recently when it uncharacteristically fell far short of Wall Street's forecast and reported an unexpected first-quarter loss. Stunned investors punished shares. Amazon stock plunged 14% on April 29, its largest one-day drop since July 2006. For all of April, Amazon stock tumbled 24%. That was its worst month since November 2008.
Now investors wonder whether the disastrous earnings report was an isolated fluke or a sign of things to come. Some on Wall Street contend the e-commerce titan just needs a few tweaks. But others say it's time for hard-charging Amazon to pause and rethink its strategy.
"Amazon needs to prove to investors that as they slow down spending, they can improve profits," Edward Jones analyst Brian Yarbrough told Investor's Business Daily.
Yarbrough and others point out Amazon has too much warehouse capacity, one key to its problems.
Amazon stock bulls, however, think the company is positioning itself for even greater success as the world emerges from the effects of Covid-19.
"In our view, Amazon is uniquely positioned to exit this crisis as one of the biggest beneficiaries of accelerated digital transformation," Monness Crespi Hardt analyst Brian White said in a recent note to clients.
Amazon Stock: How The Quarter Went Wrong
How did Amazon's first quarter of 2022 turn out so bad? Though quarterly revenue was near expectations, Amazon's earnings dried up, leaving a large loss in their place.
Amazon reported its slowest quarterly growth rate since 2001. Revenue rose 7% to $116.4 billion, vs. 44% growth in the year-ago period. The number of products that Amazon sold was flat from a year ago, and its costs to sell those items increased. Its operating income was a disappointing $3.7 billion, while Amazon stock analysts were projecting $5.3 billion.
Operating income was hit by several headwinds. These included $2 billion in costs due to excess capacity, as well as $2 billion of added costs due to operational inefficiencies and excess labor. Another $2 billion in costs came from inflation. In addition, the company recorded a $7.6 billion non-operating loss from its stake in electric truck maker Rivian Automotive.
Overall, the Amazon earnings report showed a net loss of $3.8 billion, its first quarterly deficit in seven years.
The Amazon earnings pinch didn't stop there. When the company presented its revenue outlook for the second quarter, it put the midrange at $118.5 billion, up just 4% and below estimates of $120.4 billion, according to FactSet. It also predicted an operating loss of $1 billion to $3 billion, vs. expectations of a $6.78 billion profit.
"We've come out of a very tumultuous two years," said Chief Financial Officer Brian Olsavsky, in a post-earnings call with analysts.
For the full year, analysts now see 2022 revenue up 12% to $527.3 billion, but earnings at $19 a share, down 71%.
Covid Helped, Then Hurt Amazon Earnings
For a time during the pandemic, things rolled for Amazon stock. As Americans hibernated, the company provided critical services throughout the pandemic, with its vaunted home delivery system. Revenue surged as Amazon could do things nobody else could.
But restrictions lifted and consumers ventured outside again. The pandemic's aftereffects helped move Amazon into an uncomfortable position. As Covid-19 began to ease, Amazon's advantage as the go-to source for all kinds of goods weakened.
Retailers such as Walmart and Target became more adept at home delivery or drive-through pickup. Amazon stumbled with grocery delivery, while others flourished.
Amazon hoped that the major impact from Covid-19 was about to recede as 2021 drew to a close. But the omicron variant of Covid reared its head in December, which created more labor problems for Amazon.
Globally, labor shortages disrupted the flow of goods through supply chains. Air and ocean shipping rates were near or above peak rates in the second half of last year. Trucking capacity became scarcer and more expensive.
Russia Invasion Takes Its Toll On Amazon Earnings
When Russia invaded Ukraine in late February, increased fuel costs and inflation made things worse.
The cost to ship goods in overseas containers more than doubled compared with pre-pandemic rates. The cost of fuel rose sharply.
Then Amazon, like everyone else, faced the highest levels of inflation in four decades. That cost the company billions.
Following the first-quarter report, analysts across the board lowered their price targets on Amazon stock. They brought it down to about 3,760 from about 4,100. Shares now trade in the 2,300 range, well below their all-time high near 3,773 in 2021.
Overall, analysts still maintain ratings of buy and outperform. Many believe Amazon has the time, money and skill to right the ship in the second half of this year.
The IBD Stock Checkup tool shows that Amazon has a weak Composite Rating of 42 out of a best-possible 99. The stock's Relative Strength Rating is a measly 27 out of 99, while its relative strength line has plunged sharply. Moreover, IBD's Retail-Internet group, which includes Amazon, ranks 188 out of the 197 industry groups tracked.
Amazon Stock: Expanding Shipping Capacity At Wrong Time?
But the central issue may have come before Covid even started, when Jeff Bezos was still chief executive. Amazon made the decision to invest billions of dollars over several years to expand its one-day delivery service.
To do that, Amazon had to build out its "fulfillment network," or warehouse capacity. It's the central nervous system of Amazon's massive e-commerce business.
The company committed to a doubling of its fulfillment network over a two-year period. Now Amazon finds itself with too many warehouse workers, which it is trying to fix. The company also is pulling back on some expansion plans. It wants to more efficiently maximize the spaces it now has.
"We are glad we made the decisions we made over the past two years," CFO Olsavsky recently told analysts. "And now we have a chance to more right-size our capacity to a more normalized demand pattern."
"Our teams are squarely focused on improving productivity and cost efficiencies throughout our fulfillment network," Chief Executive Andy Jassy said in a recent written statement. "We know how to do this and have done it before. This may take some time, particularly as we work through ongoing inflationary and supply chain pressures."
Employment troubles come, however, as some Amazon workers are voting to unionize. In late March, workers at a massive Amazon facility on Staten Island voted by a wide margin to form a union, in one of the biggest victories for organized labor in a generation. Early this month, a second attempt at another warehouse facility to join a union failed.
Overly Fixated, Or In Prime Position?
Wedbush analyst Michael Pachter thinks Amazon remains overly fixated on one-day delivery. He believes it's enormously expensive and damaging to Amazon stock.
"I think this is management shifting its focus from delighting shareholders to delighting consumers," Pachter told IBD. "Good management teams make share prices go up every quarter."
But Amazon stock analyst Brad Erickson of RBC Capital Markets remains confident. He sees Amazon gaining e-commerce share over the next three to five years. And that's mainly due to the expansion of one-day shipping.
"We see this as a key tool in driving conversion and leading to higher-than-market e-commerce share gains," he wrote in a note to clients. "Given the emergence of restaurant and grocery delivery providers, we think these types of industries, which have exploded since Covid, have ramped consumer expectations."
Other Players Feeling The Pain
If there's any consolation, Amazon is not the only company struggling with the slowdown after a pandemic-fueled surge in e-commerce revenue.
Shopify reported first-quarter results that missed estimates and said it expects revenue growth will be lower in the first half of the year as it navigates tough pandemic-era comparisons. The company provides services for companies to sell products online.
Etsy and eBay reported better-than-expected first-quarter results but gave weak guidance for the current quarter that suggests the e-commerce sector is cooling off.
Also, Snap reported earnings in mid-April that missed estimates as CEO Evan Spiegel said the first quarter proved more challenging than expected.
"On the revenue side, forward-looking visibility is as difficult today, or perhaps more difficult, than at any point in recent memory," he said. "Advertisers in a wide variety of industry groups reported concerns related to the macro-operating environment, including continued supply chain disruptions and rising costs."
New World May Help Amazon Stock
One thing to consider is the huge impact Covid-19 had on how companies operate. Businesses shifted to remote work at a speed never before seen. Consumers also changed how they work, shop and entertain.
Technologies making this shift possible include cloud computing, e-commerce, digital payments, artificial intelligence, 5G wireless and videoconferencing. Amazon continues to dominate in two of these categories, the enormous fields of cloud computing and e-commerce.
Though Amazon is facing a slowdown in its core e-commerce business, AWS benefits from digital transformation trends and will likely continue to grow rapidly, analysts say.
Amazon's cloud computing business, Amazon Web Services, was the star of its latest earnings report. It reported revenue of $18.44 billion, up 37% and above estimates of $18.27 billion. AWS accounts for 22% of sales but nearly 60% of profit.
Brokerage UBS said in a recent note to clients that 44% of the 850 respondents to a survey expect accelerated cloud adoption post-Covid.
"We estimate the market for cloud services is likely to more than double in the next few years, touching nearly $600 billion in revenue by 2024," UBS said. That's up from $270 billion in 2019.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
